FOR THE NORTHERN DISTRICT OF CALIFORNIA
TECHNICAL EQUITIES CORP., No. 3-86-00366 LK
TECHNICAL REAL ESTATE
INVESTMENTS, INC., No. 3-86-00760 LK
JEROME E. ROBERTSON, Trustee,
v. A.P. No. 3-89-0298 LK
FIRST NATIONAL BANK, et al.,
Memorandum of Decision
Despite a considerable amount of argument over the admissibility of evidence, the facts do
not seem to be subject to substantial dispute. Prior to bankruptcy, as part of what the plaintiff
Trustee describes as a Ponzi-type scheme, the debtor created partnerships, sold property to
them, and then entered into management agreements with them. In order to entice new
investors, the debtor would pay each partnership's expenses regardless of that partnership's
income generated from its property.
Now before the court is a dispute between the Trustee and Great Western Savings & Loan
Association, which had been the holder of a first trust deed to property owned by Pacific Real
Estate Investments, one of the debtor-created entities. The Trustee alleges that before
bankruptcy the debtor paid out approximately $170,000.00 on behalf of Pacific, but received
only $100,000.00 in income relating to Pacific properties. It therefore seeks recovery of those
amounts it paid to Great Western on Pacific's behalf as fraudulent transfers pursuant to section
548(a)(2) of the Bankruptcy Code and state law. Section 550(a)(1) of the Code gives the
Trustee the option of recovering avoided transfers from either Pacific or the entities the debtor
paid on Pacific's behalf. Although the payments were only $926.00 per month, the total sought
from Great Western over the four-year period of avoidability asserted by the Trustee is about
$30,000.00. Significantly, rents collected by the debtor from the property subject to Great Western's lien exceeded the amount paid to Great Western. Now before the court are
cross-motions for summary judgment as to the avoidability under section 548(a)(2) of about
$11,000.00 of that total paid during the year prior to bankruptcy.
Great Western defends the action by pointing out that while in the aggregate the debtor may
have paid out more on behalf of Pacific than it took in, the rents the debtor received from the
property which secured Great Western's lien exceeded the payments the debtor made to Great
Western. Since Great Western had a security interest in the rents, it argues that there were no
payments for less than equivalent value as to it
and it is therefore entitled to summary
It is clear that Great Western's position is the correct one. Generally speaking, a payment
on a third party's debt which benefits only the third party is avoidable as a fraudulent transfer.
However, if the debtor receives any benefit at all, even indirectly, the court may find that it
received reasonably equivalent value. Klein
, 610 F.2d 1043, 1047 (2nd
Cir.1979); In re Burbank Generators, Inc.
, 48 B.R. 204, 207 (Bkrtcy.C.D.Cal.1985). What
constitutes reasonably equivalent value is a question of fact to be determined in each particular
case. Matter of Christian & Porter Aluminum Co.
, 584 F.2d 326 (9th Cir.1987). In this case,
the rents on the property were the collateral of Great Western, and they went to the debtor
estate only because Great Western, being paid by the debtor, had no need to enforce its rights
in the rents. The debtor estate therefore received equivalent value from Great Western for its
payments to Great Western.
The essential legal issue in this case is whether the estate can recover from an immediate
transferee a payment the debtor made on a third party's behalf, even if the transferee gave
equivalent value to the debtor. The court answers this question in the negative; if the transferee
gave enough to the debtor to keep the estate whole, it is not liable merely because the overall
payments made on behalf of the third party exceed the overall value received by the estate. In
other words, section 548 is to be applied to each transfer
, not all transfers as a whole.
For the foregoing reasons, the Trustee's motion will be denied and Great Western's motion
will be granted. Moreover, since the same principles discussed above apply equally to state
law, judgment shall be entered in favor of Great Western and against the Trustee as to the entire
case. Great Western shall recover its costs of suit. Counsel for Great Western shall submit an
appropriate form of judgment.
Dated: March 19, 1991 _______________________